Is it a Good Idea to Merge Vodafone + Idea Cellular ?

Reliance Jio’s free pricing blitzkrieg has triggered the largest round of consolidation in the telecom industry. Vodafone and Idea Cellular are reportedly in talks for what could possibly be an all share merger deal; Vodafone indicated that its 42% stake in Indus is excluded from any potential transaction. Such an agreement would combine the 2nd and 3rd largest domestic telco operators, commanding ~40% revenue and 35% subscriber market share, ahead of Airtel’s 31% revenue and 25% subscriber market share.

Key Synergies for Vodafone – Idea Cellular Merger
Idea and Vodafone combined will have pan-India 3G as well as 4G coverage with multiple carriers in most circles. The combined entity will have both best in class coverage as well as capacity spectrum. While the combined entity will have to give up some spectrum in 900MHz and 2500MHz, the coverage spectrum footprint in 900MHz in 17 circles (remaining 5 circles are small) contributing more than 90% of industry revenues will be significant competitive advantage.

Complementary positioning with Idea a strong player in rural, while Vodafone is strong in urban circles; Potential synergies on the profitability due to saving particularly on network operating costs (23% of revenue); Lowering of annual capex, Idea +Vodafone FY17E capex is estimated at INR185bn vs Bharti at INR160bn; Reduction in cost of active infrastructure due to overlapping sites.

Key Challenges / Hurdles for the Merged entity
The merger seemingly very positive will face huge regulatory hurdles. The two primary regulatory hurdles are 1) breach of RMS of 50% and 2) Exceeding of spectrum caps in 900MHz band. The combined entity will breach the RMS in 7 key circles which drive the profits for the two companies. The combined entity will also breach the spectrum cap of 50% of allocated band spectrum in 5 key circles in 900MHz and 2 circles in 2500MHz band. In this scenario the option is to either trade or surrender the excess spectrum.

Additionally, Vodafone India’s past tax issues still unresolved. Idea + Vodafone’s ownership of Indus at 58% would be a majority stake in a JV structure; control of the merged entity would be a moot point in merger discussion; management bandwidth would be taken away in integration and could prove costly in the face of intense competition from Reliance Jio.

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